Facebook – A valuations exercise

Posted by
Harsh

3rdFeb
'12

With the world’s most awaited IPO filing finally out, let’s have a look at what the valuations look like.

The charts below shows FB financials, valuations, and peer analysis. I have assumed a slowing net income growth due to the base effect. There are 3 IPO scenarios here, $5bn raised at different prices. Scenario 1 gives us a pre-money valuation of $70bn, which is the lowest valuation figure I’ve come across in news articles. Scenario 2 considers the current share price of FB on sharespost.com, and Scenario 3 is at the rumored issue price of $45.

Scenario 1 is also compatible with what Zuckerberg says in his letter attached to the S-1, that “We’re going public for our employees and our investors. We made a commitment to them when we gave them equity that we’d work hard to make it worth a lot and make it liquid, and this IPO is fulfilling our commitment.” The last stock issue to external investors happened at $20.75 in Jan 2011, and a $28 price gives them a 35% return. The highest option exercise price at FB is $15, and the last round of RSUs taken by Zuckerberg in Dec 2011 were valued just a tad higher at $29.

Scenario 1 implies a growth of 42%, lower than a 52-53% common sense growth projection, but is still a premium of 15% over peers. This is also a fair value based on a PE of 74x for peers.

Adding growth into the math, an IPO at the current share price of $36 implies a growth of 54%, a premium of 27% over peers, and a Price/Sales of 26x. This is in line with what a few articles such as this say. I give FB that, considering it is a younger company than peers. Looking at only PE, the valuations seem stretched, but throw 53% growth into the calculations, and the fair price comes to $35 anyways.

If we start going further north to the rumored $45 price, the numbers stop making any sense. A PE of 120x and implied growth of 13% more than what common sense assumes.

In either scenario, the valuations look stretched based on Price/Sales, which dictate a $14 share price.

You can play around with the numbers and create various scenarios to gain a deeper understanding of the numbers and valuations. Just ensure that the amount raised does not cross $10bn and pre-money valuations don’t venture too far beyond $100bn, to stay realistic.